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Dollar cost averaging

Some people have learned to make investing a bit easier by utilizing a popular investing technique called dollar cost averaging.

How exactly does it work? You buy a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. In essence, you're buying more shares of that investment when prices are low, and fewer shares are bought when prices are high. Investopedia.com has a phenomenal video that explains this concept with an easy to follow example.

Dollar cost averaging doesn't guarantee you against losses and it helps to make sure you're investing on a regular basis. Investing regularly is a great strategy to implement because it takes the guessing out of investing. So many people try to "time" the market and while you may have success in the short run, most who try to time the market end up losing more in the end. However, successful day-traders or active investors may argue the contrary. But, most of us don't have the discipline, nor time, to constantly watch the market and place trades.

Many of us have been doing dollar cost averaging for years and didn't even realize it. Are you participating in your company's 401k/403b plan? If so, then you're dollar cost averaging. The money that's being applied to your retirement account is being placed into your designated investment allocation each pay period. Aside from retirement, dollar cost averaging is a great tool for the novice investor. Someone who is just starting their investment program may not be willing to drop $5,000 into an investment, but if they have saved $5,000 and want to start investing, maybe they do a monthly contribution of $200-$300/month.